Exam (elaborations)
TAX 503 CHAPTER 7 EXAM QUESTIONS AND ANSWERS
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TAX 503 CHAPTER 7 EXAM QUESTIONS AND ANSWERS...
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Income from passive investments may be taxed at ordinary rates,preferential rates, or may be exempt from taxation while income from
portfolio investments will be taxed at ordinary rates. - ANSWER False
Which of the following types of investments generate dividend income?
(Check all that apply.) - ANSWER Corporate stock
Mutual fund investments
Qi, Julian, and Omar are all in the 24% tax bracket. Qi has received
$3000 in corporate bond interest, Omar $2500 in savings account
interest, and Julian $2500 in dividends from a US corporation. Rank the
taxpayers by their tax liability from the amounts received, from least to
greatest. - ANSWER 1. Julian received $2500
2. Omar received $2500
3. QI received $3000
Which of the following choices concerning the recognition of interest
income for corporate bond are CORRECT? (Check all that apply.) -
ANSWER - If bonds are purchased at a premium in the secondary
market, the premium can be amortized or added to the basis of the
bond.
- If bonds were issued at a discount, special original issue discount rules
apply
- The actual interest payments received are included in gross income
Which of the following investments do NOT pay periodic interest
payments, but rather accumulate interest over the life? - ANSWER U.S.
savings bonds
Which of the following types of income is generated from passive
investments rather than portfolio investments? - ANSWER Operating
income
Which of the following types of investments generate interest income?
(Check all that apply.) - ANSWER Savings accounts
, Government bonds
Certificates of deposit
Corporate bonds
Interest income is generally taxed at lower capital gains rates. -
ANSWER False
Which one of the following statements is INCORRECT regarding interest
earned on U.S. savings bonds? - ANSWER Taxpayers include the
periodic interest payments from U.S. savings bonds in gross income
each year when received.
Which of the following choices determine the amount and the timing for
recognizing interest income? (Check all that apply.) - ANSWER - If
bonds were issued at a premium, taxpayers may amortize the premium
over the life of the bond resulting in a decrease in interest income.
- If bonds are purchased at a discount in the secondary market, the
discount is recognized as interest income at maturity.
- The actual interest payments received are included in gross income.
U.S. _____ ______ , do NOT pay periodic interest payments, but the
interest accumulates over the term of the bond. - ANSWER treasury
bonds
Regarding portfolio investments, which types of income generally are
taxed at a rate lower than the taxpayer's marginal tax rate? (Check all
that apply.) - ANSWER Long-term capital gains
Qualified dividends
Brent, a single taxpayer, has a 24% marginal tax rate. He is considering
an investment that will earn qualified dividends at a rate of 7% before
tax. What is Brent's after-tax rate of return on the securities? - ANSWER
5.95%
Andrew invested in a U.S. Savings bond. He paid $500 for the initial
investment one year ago. The redemption value of the bond increased
by $25 in the current year. Which of the following options is NOT
acceptable for reporting the income? - ANSWER Andrew may request
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